Cleaning companies adapt to a changing Russian economy

18th of September 2014

ECJ correspondent Oleg Popov of Cristanval Cleaning in Russia explains how economic changes have impacted on the sector.

Just a few years back, the cleaning market was not only experiencing steady growth but a boost in its profitability. In a period of well-being, companies strive to enlarge their business and grab a share of the market. For the sake of clinching an ‘image’ contract, the company can sacrifice its profit margin. Low-margin but significant facilities help the company to win other tenders. While the market is growing, the company should try to pursue other opportunities.

Over the past year, the situation in the Russian cleaning market has changed drastically. The market continues to grow by 25-30 per cent per year through the commissioning of new facilities, but revenue has been declining. Due to changes in state migration legislation, businesses now have a new expense they have never faced before – a need to invest in their workforce.

All these expenditures now fall totally on cleaning companies - clients, who are experiencing a decline in their markets, are not prepared to cover these additional costs in the price of the contract.

In previous years, thanks to the mass influx of migrants into the market and the absence of restrictions on their employment, it was possible to engage in low-budget projects. In August 2013 however, amendments were made to migration legislation. These, most importantly, had to do with the liability of non-Russian citizens having no registration and work permit; the new rules require one to go through many procedures and present and have processed a whole list of documents in order to work legally in Russia. Higher fines were also introduced for breaking these rules.

Russian cleaning companies immediately felt the shortage of CIS citizen workers. As a consequence, foreigners with a package of all the necessary documentation became worth as much as RF citizens. In truth, few Russians want to work in the cleaning business, since it is a low-prestige job.

Nowadays, it is the personnel who choose their employer – not the other way round. In order to attract workers, cleaning companies now provide their workers with room, board, cover their travel and health care expenses, and grant them pay advances.

The payroll fund has grown. In theory this has to be reflected in the cost of contracts, as payroll is the main expense in any contract – 60-70 per cent. But clients are not prepared to increase their payment, since they are trying to economise through outsourcing.

Amid such uncertainty, it is risky to undertake low-margin projects, for at any time they can end up in the red and take the entire company down with them. So it is important to have a financial safety margin and a pool of reliable and viable clients.

Therefore, what is coming to the forefront is not the struggle for a share of the market but rather a fight to retain the company’s market position and protect its infrastructure.

Smaller companies are trying to take advantage of the situation in the market and compete with the leaders. They are doing this through dumping and are trying to win contracts in large facilities.

Apart from a sales strategy, in what other ways are cleaning companies expected to change? In a period of downturn, a large business may react to challenges quite slowly. So it makes sense to let the various branches of the business engage in independent work. Smaller business teams are more mobile and have less trouble ‘realigning the ranks’. In this way the company is not losing its operational flexibility.